TMFMmbop (38.74)

October 2010

7

Four Chinese education companies will IPO this year and industry leader New Oriental is trading for more than 7x sales and 30x EBITDA. This space is starting to look bubblicious, and investors will get hurt. Read more in this week's Global View:

What sector of stocks has been among the worst-performing in the U.S. stock market this year? Consider the case of for-profit educators. Because of concerns about the quality of their product, heightened government regulation, and potential enrollment declines, Apollo Group (Nasdaq: APOL), ITT Educational Services (NYSE: ESI), and DeVry (NYSE: DV) are all off well more than 20%. Further, high-profile short-sellers such as Jim Chanos and Steve Eisman remain bearish on these stocks.

That performance and sentiment, however, differ enormously from how investors are treating for-profit education on the other side of the world. Three Chinese for-profit educators have IPO'd since August, raising some $300 million, and that country's private education leader, New Oriental Education & Technology (NYSE: EDU), is up more than 20%.

Are the dynamics that govern this space so different in China that private educators there deserve such a rosier outlook? My expectation is no and that investors in Chinese for-profit education today are headed for disappointment.